When you think of the holiday season, what comes to mind? Gift exchanges? Holiday parties? Home-baked pies? Taxes?
We know you have a lot of other things to do this time of year-baking those pies, for example-but, as your WIFE, we must remind you of those important details that are so easy to overlook.
The holiday season is a great time to take some last-minute tax deductions before the year is over. Here are some of our favorites:
1. Ask for a New Year's bonus instead of a Christmas bonus.
By delaying your bonus by only a week, you can push the payment of taxes on the income 15 months into the future -- a year from next April.
2. Clean out your closets
Clean your closets and donate to charity the old clothes, sporting goods, books, and other household goods that you no longer use. You will welcome the New Year with new space in your life, and get a quick tax deduction to boot. Document these donations by making a list of the items at the time you donate them. A good rule of thumb is to value donated items at 20 percent of original cost.
3. Pay donations by credit card.
Payments made by credit card are deductible in the year they are charged, not the year they are paid, so you can donate to your favorite charity by year-end and not pay the bill until next year.
4. Contribute the maximum to your 401(k) or 403(b) retirement plans.
Some employers will allow you to catch up on contributions by increasing your deduction on your last paychecks of the year. If you are 50 or over, don't forget that you can contribute an additional $5,500 "catch-up" contribution in addition to the regular 401(k) or 403(b) $16,500 limit.
5. Check the balance in your flexible spending account.
A wonderful fringe benefit, these helpful plans allow you to set aside a portion of your salary before taxes for certain purposes, such as child care or health care expenses. Unfortunately, these plans work on the "use it or lose it" concept: any amount unused at the end of the year is lost. So make sure to spend all of the money in the plan by the end of year.
6. Bunch your medical bills.
Medical expenses are only deductible when they exceed 7.5% of your adjusted gross income. If your income is low this year or your other medical expenses are high, speed up your deductions accordingly. If you want to take the deductions this year, pay any outstanding medical bills before year-end, stock up on prescriptions, get new glasses, and pay your health insurance premiums before the end of the year.
7. Do a rough calculation of your taxes for this year now.
Use last year's tax preparation software to estimate this year's taxes, or note your new numbers in the margin of last year's tax return and use last year's tax rates as a rough approximation. The IRS treats income taxes withheld from your paycheck as if they were paid in equal amounts throughout the year. So if your calculations show you'll owe money, you can increase the withholding on your last paychecks of the year to make up the difference.
8. Don't forget to take miscellaneous deductions.
You can deduct union dues, legal and professional fees relating to tax and investment advice, and unreimbursed employee business expenses of mileage, equipment, education, and supplies, among other things. If you pay a lot of expenses for your job or your investments, gather up the receipts and cancelled checks. Your combined miscellaneous expenses can be deducted if they exceed 2 percent of your adjusted gross income.
9. For educators only:
Elementary or secondary schoolteachers (in both public or private schools) can deduct up to $250 paid for classroom supplies. A new rule makes its debut this year, allowing you to write off up to $250 of such out-of-pocket costs, even if you don't itemize deductions.
10. Consider converting your regular IRA to a Roth.
If your modified adjusted gross income is less than $100,000, you can convert your IRA to a Roth. You will have to pay tax on the amount converted (less any nondeductible contributions in the IRA), but all future growth will be totally tax-free.